The due diligence process consists of a detailed examination of equipment, inventory financials, contracts, and intellectual property. It also involves an examination of any legal issues that could affect the acquisition.
Due Diligence is a vital element of any M&A transaction. It helps investors determine the true worth of a company. Often, due diligence involves reviewing documents that are confidential to business and requiring the signing of non-disclosure or noncompete agreements. These procedures must be completed completely to avoid any issues that could negatively affect the deal, or even cause it to fail.
Investors should also be looking for any concerns regarding intellectual property such as patents disputes, licensing and disputes. Investors should also take a look at the company’s culture and its severance plan golden parachutes, severance package, and stock purchase options.
The $9 billion loss at Theranos is an eloquent reminder that you should always do thorough due diligence prior to investing. Although many of the red-flags were obvious, this shouldn’t be a reason to avoid this process. Due diligence can be a long, time-consuming process that requires coordination of many stakeholders and the expertise of professionals in various areas. It is important to define the objectives of your due diligence, which will help you determine the resources required and the information you can gain from it. In some instances it could be necessary to involve external experts, such as attorneys, insurance agents, or consultants in technology or finance.